There comes a time to stop throwing good money after bad and simply walk away. And that’s exactly what Target Corp (TGT) is doing in its decision to leave Canada. But while Target is walking away from Canada, dividend investors shouldn’t walk away from Target stock. After a rough couple of years, Target finally seems to have righted the ship. And I expect Target’s dividend growth—which already put it in elite company among large-cap stocks—to accelerate as a result.
After losing about $2 billion in its Canadian operations—and coming to the realization that they wouldn’t be profitable until 2021 at the earliest—Target CEO Brian Cornell made theannouncement on Thursday.
Adding to the good news, Target announced that same-store sales for the fourth quarter would be up about 3% rather than the prior guidance of about 2%. Target’s stores are seeing good foot traffic, and its revamped web presence is getting good results.
Target has finally shaken off the pall that the 2013 data breach cast over the company. Shoppers are comfortable swiping their credit cards at Target stores again…or at least no more worried at Target that they would be at any other store.
Let’s talk dividends. Target stock’s current dividend yield, at 2.5% may not catch your attention on its own. But Target has been growing its dividend at a 20% annual clip for over a decade. And I’m not using dated data here; Target’s dividend growth has actually accelerated in just the past five years. A time, by the way, in which most retailers have really struggled.
Target Dividend Growth
| Period | Percent |
| 1 Year | 19.90% |
| 3 Years | 23.40% |
| 5 Years | 24.60% |
| 10 Years | 20.10% |
Now let’s take a look at one of my favorite metrics for dividend stocks: yield on cost. This is the current annual dividend divided by your original cost basis, or the effective dividend yield you would be enjoying today on your original investment.
Had you bought Target stock three years ago and held it until today, you’d be enjoying a yield on cost of 4.7%. Had you bought it five years ago, you’d be enjoying a yield on cost 7.51%–about in line with a risky leveraged bond fund. And if you had bought Target 10 years ago, you’d be enjoying an almost too-good-to-be-true 15.61% yield on cost.
Do I expect the next ten years to look like the last? Maybe, maybe not. The picture gets murkier the further out into the future you look. But I feel pretty comfortable assuming that Target can maintain 20% dividend growth for at least another 3-5 years. And it’s worth noting that Target has raised its dividend every year for 47 consecutive years. This is a company that takes its obligation to its shareholders seriously.
It’s also worth noting that Target rewards its shareholders in more ways than by simply paying a dividend. Target has also been aggressively buying back its shares. Over the past ten years, Target has repurchased nearly 40% of its shares.
Target’s dividend payout ratio is a little high at 76%. But with Target winding down its loss-making Canadian operations and with its domestic stores seeing signs of life, I expect Target to have a lot more cash available to keep its dividend streak alive and probably accelerate it.
Add shares of Target stock to your long-term income portfolio. Enjoy its current yield—which is very competitive in a world where the 10-year Treasury yields less than 2%–and enjoy what I expect to be many years of solid dividend growth.
Disclosure: Long TGT
